Just a few minutes ago, CNBC’s Bob Pisani complained that Americans don’t understand that banks need to preserve the capital they’ve received from the government rather than lend it out.
“They’re under intense pressure to lend when they need to shore up their capital. They’re under intense pressure to lend when, in a sense, they should be doing the opposite. And it’s impossible, it seems, to explain to the public exactly what they should be doing,” Pisani said.
Well, there’s a good reason the public won’t accept the capital preservation argument from banks: it’s the opposite of what they were told when they lent the banks the money.
The public rationale for the bailout was two-pronged:
- a disorderly disolution of major financial institutions would create a financial catastrophe that would wreck the economy; and
- injecting money into the banks would enable them to lend more into the economy, so that the Wall Street bailout would effectively bail out “Main Street” too.
You know what wasn’t on the list: allowing dead-in-the-water banks to remain afloat by on taxpayer capital.
Now, we can argue whether this dirty little secret of the government’s handout of billions to banks was the plan from the start. But there’s no arguing that the public was never told that this was the plan. And neither were Congressional lawmakers.
“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Hank Paulson said back in October. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.”
The plain fact is that the banks were far worse off than they let on, and that regulators either went along with the deception or were duped. But just because the bailout was based on lies doesn’t mean the public shouldn’t be mad as hell and unwilling to take it anymore.
So please shut up about the dangers of the public demanding banks perform on their half of the bargain. Of course the demand for politicized lending is dangerous. It’s perfect rational for banks to hesitate to lend into the broken economy, and there is a lot of evidence that the demand for business loans is down.
But that’s no reason to defend what’s actually happening now, which is taxpayer money propping up the balance sheets of banks that should simply be allowed to fail, with their good assets seized by regulators and quickly sold off.
Of course, with a $250 billion injection into America’s biggest banks – not all of which were troubled – Mr. Paulson had a political sales job to do. And no requirements to lend were attached to the money.